uncertainty - UBC COMM/FRE 295 Choice Under Uncertainty...

UBC COMM/FRE 295 Choice Under UncertaintyQuestion #1Suppose Smith’s utility function is given by U(m) = m. If Smith has an initial wealth of $10, 000, which of the following gambles has the highest expected utility? Gamble 1: If the coin comes heads, Smith wins $100; if tails he loses $0.50. Gamble 2: If heads, he wins $200; if tails he loses $100. Gamble 3: If heads he wins, $20, 000; if tails he loses $10, 000. Question #2Suppose you have been accepted by two universities A and B. A is a much more demanding and also much more prestigious institution than B. B is a safe option in the sense that you know you will do reasonably good there and will land an “adequate” job that pays you m= $690, 000 for your lifetime. If you manage to survive academically at A, you will land a great job that pays you $1000, 000. If you do poorly you will end up with a bad job that pays you $250,000 (all the payments are in present values terms). The probability of surviving at A = 0.6. If your utility function U(m) = m, which university will you attend?

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